Apple’s 6,000% Rally Began With ‘Stretched’ P/E of 165

July 22 (Bloomberg) -- Oftentimes Federal Reserve reports
can serve as a good treatment for insomnia, but last week’s may
be keeping investors in growth stocks up at night.

If you’ve been losing any beauty rest over the Fed’s
remarks about stretched valuations in some stocks last week,
consider this: The world’s biggest company had a price-to-earnings ratio of 165 a little more than a decade ago. That’s
higher than all but one of the current valuations for the 121
stocks in the Nasdaq Biotech Index and all but two of the
companies in the Nasdaq 100 Index. (To be fair, this excludes
unprofitable companies in both gauges, but you get the drift.)

You probably don’t need to be told what happened to Apple’s
stock after reaching that lofty P/E in September 2003, but here
it is anyway: It rallied almost 6,000 percent.

Of course, not every growth stock today offers a chance to
invest in a company that will create a device to serve as your
stereo, calculator, camera, guitar tuner, taxicab dispatcher or
whatever else an iPhone does.

Still, a look back at some other richly-valued stocks a
decade ago is illuminating. The second-highest P/E in the Nasdaq
100 on July 21, 2004, was Comcast Corp. at 186 times earnings.
(The highest was Comverse Technology Inc., which was later
acquired.)

Time Machine

Comcast is up about 190 percent since. (It wasn’t a smooth
ride, of course: The shares lost about 63 percent peak-to-trough
in 2007-2009.)

There are some duds on the list. Yahoo! Inc. is only 18
percent higher over the decade, Juniper Networks Inc. has risen
6.4 percent and BlackBerry Ltd. has tumbled more than 50
percent.

But overall, get this: buying the most-richly valued stocks
in the Nasdaq 100 a decade ago was not a bad trade (again,
excluding unprofitable companies.) Amazon.com Inc. is up more
than 700 percent and Biogen Idec Inc. has rallied about 450
percent.

Even excluding Apple -- and two companies that have since
been acquired -- the stocks with the top 10 highest P/Es in the
Nasdaq 100 a decade ago are up an average of 185 percent since.
By comparison, the index itself is up 184 percent and the
Standard & Poor’s 500 Index is 80 percent higher.

Apple will release earnings after the bell today, and the
report is unlikely to show the kind of growth that propelled it
up 6,000 percent into the world’s largest company by market
value.

So is the world’s biggest stock of 2024 lurking somewhere
at the top of the stretched valuation charts? Who knows. Might
as well sleep on it.